‘Abenomics’ dark side: hinterland pay cuts

Prime Minister Shinzo Abe’s cuts to local-government subsidies are like trying to “wring water from an old rag that’s been squeezed dry,” says Kazuya Yoshida, a 27-year municipal employee in Shijonawate, Osaka Prefecture.

Abe pared payments to regional authorities by ¥392 billion, or 2.3 percent, deepening decade-long cutbacks for city and prefectural budgets hurt by falling populations and dwindling revenues. While Abe has deployed fiscal stimulus at the national level to revive the economy, a drop in wages for local civil servants risks prolonging deflation.

While Abe is pushing companies to raise pay levels on the surface, his regional budget cuts are diluting his policymakers’ campaign to rekindle inflation. Four-fifths of Japan’s 3.43 million state employees work for municipalities, with their wages influencing private employers’ compensation decisions, according to Yoshito Kan, 53, executive secretary of the Osaka Confederation of Trade Unions.

“Local government wage-setting is very important in terms of the impact on the private sector,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who previously worked at the Bank of Japan. “Reducing local government wages is of course inconsistent with the end-to-deflation story.”

Those in regional cities have already taken the brunt of those cuts as at least six recessions in the past 20 years eroded revenue. The average monthly wage for an official in Shijonawate has fallen 20 percent in the past decade to ¥299,500, according to the city. That compares with a 4.9 percent drop to ¥460,587 for Tokyo government workers.

“Wage cuts for local officials risk widening economic gaps among regions and nailing already weak areas further to the wall,” said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.

The angst among local authorities hasn’t fed through to political consequences for the ruling Liberal Democratic Party, which is poised to take complete control of the Diet in the July 21 Upper House election. Abe’s LDP, along with coalition ally New Komeito, will probably win a majority in the upper chamber, according to poll early this month by the daily Yomiuri Shimbun. This will facilitate the passage of legislation as it already controls the more powerful Lower House.

Abe’s administration hasn’t said whether it plans to make further cuts to local government subsidies in the next annual budget, due in December.

The three-pronged policy prescription of Abenomics includes traditional fiscal stimulus, along with radical monetary expansion and structural reforms. A ¥10.3 trillion spending package enacted in February spanned from reconstruction and disaster prevention projects in the aftermath of the 2011 earthquake and tsunami to measures designed to encourage private investment.

“For local economies, avoiding government wage cuts would be more help than boosting public work projects,” said Motohiro Adachi, an economics professor at Wakayama University who wrote a book on the decline of Japan’s regional retail industry after visiting some 300 shopping districts. “It’s not a wise policy to cut wages now, because consumption is a leading force for Japan’s economic growth.”

The pain from constraints on pay will escalate as Bank of Japan Gov. Haruhiko Kuroda’s monetary easing stimulus — which has driven down the yen 20 percent in the past eight months — sparks broader cost-of-living increases. With the bulk of the nation’s nuclear plants shuttered, the weakening yen sparked the biggest gain in utility costs in almost five years in May. Excluding fresh food and energy, consumer prices fell 0.4 percent from a year earlier, the statistics bureau said.

Optimism that Abenomics will work has contributed to upgraded forecasts for the third-largest economy and boosted the Topix index of shares 64 percent over eight months. Industrial output rose 2 percent in May, while retail sales gained 1.5 percent. Fifty-five percent of respondents to a Nikkei newspaper survey last month approved of Abe’s economic strategy.

Faster growth would help support tax revenues as Abe contends with the world’s biggest public debt burden. Last month, the prime minister pledged to halve the primary fiscal deficit, which excludes debt-servicing costs, to 3.2 percent of gross domestic product by fiscal 2015, from 6.9 percent this year.

Japan reduced the pay of central government workers by an average of 7.8 percent last year, the biggest reduction since World War II, partly to help finance reconstruction from the 2011 Great East Japan Earthquake. Even so, trimming public-sector wages further may have less of a direct impact on the national economy than in other developed nations because Japan’s state payroll makes up a smaller proportion of the working population.

The government hires about 6.7 percent of the nation’s workforce, compared with 14.6 percent in the United States, 9.6 percent in Germany and 17.4 percent in the U.K., according to data from the Organization for Economic Cooperation and Development.

That’s little consolation to Yoshida, whose wife also works for the city of Shijonawate to help support their two kids. He’s concerned that a further fall in wages would threaten to erode savings used to pay the school fees.

“We can hardly keep up as it is,” he said.

Some colleagues are even borrowing to pay school fees or reducing life-insurance payments as higher electricity bills and mortgage payments drain their budgets, said Yoshida, who is also chairman of the Shijonawate officials’ labor union.

Among the 47 prefectures, 36 said they are considering wage cuts, a central government survey published on June 13 showed. The Abe administration is “breaching the fiscal autonomy of local governments,” the national association of city mayors said in a statement June 5. “It’s extremely regrettable that the central government is ignoring all administrative cost-cutting efforts we municipalities have made up to now.”

“There may be some who hail Abenomics, but most people outside big urban areas don’t have many stock investments and are excluded from the benefits,” said Hitoshi Hazawa, who has worked for Akita Prefecture for 30 years and now chairs the local union of government officials. “Many restaurants here are already empty because people are eating out less, and wage cuts will only cut consumption further.”

Akita, which is famous for its rice farming and sake, will lose more than a third of its population by 2040, the fastest contraction in Japan, government data say.

“It will take a while before benefits reach regional economies,” Finance Minister Taro Aso said on July 9 after visiting Oita and Iwate during the election campaign. While there are signs of improvement in Tokyo, “you would be wrong if you assume the same things are taking place in regions.”

Elsewhere in Asia this week, Singapore reported its fastest economic growth in more than two years, an annualized 15.2 percent expansion in the second quarter from the previous three months.